Fixed-Rate Mortgages Losing Popularity?

Fixed-Rate Mortgages Losing Popularity?

Daily Real Estate News |
Wednesday, January 29, 2014

A resurgence is occurring with adjustable-rate mortgages, as more borrowers explore their options beyond 30-year fixed-rate mortgages, according to Freddie Mac’s annual ARM survey. As 30-year rates trend higher, more borrowers are being lured to the low introductory rates of ARMs, which remain near historical lows, the report shows.

"Home buyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment," says Frank Nothaft, Freddie Mac’s chief economist. "As longer-term rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants. Hybrid ARMs are particularly attractive because they have an initial extended fixed-rate period of three to 10 years.”

Hybrid ARMs -- particularly the 5/1 -- are the most popular loan product chosen by ARM borrowers, according to the Freddie Mac survey.

"Borrowers who have taken out ARMs generally prefer hybrids, because these products include an extended initial period where the interest rate is fixed,” Nothaft says.

During 2013, ARMs comprised one in 10 new home-purchase loans, according to the Federal Housing Finance Agency. "We are expecting ARMs to gradually gain back some favor with mortgage borrowers, with the ARM share rising to 12 percent of the home-purchase market in 2014,” Nothaft says.

For a borrower taking out a 30-year, 5/1 hybrid ARM instead of a 30-year fixed-rate mortgage, the savings was about 1.36 percentage points in January, Freddie shows. This would amount to a savings on the monthly principal and interest payment of about $194 on a $250,000 loan for the first five years.